Downgrade in Russia’s Ratings

Following severe sanctions implemented on Russia by the western countries, Moody’s and Fitch downgraded the country’s sovereign rating to ‘junk’ grade.

Overview:

  • Russia’s long-term issuer and senior unsecured (local and foreign-currency) debt ratings have been downgraded to ‘B3′ from ‘Baa3’ by Moody’s Investors Service.
  • Fitch meanwhile has downgraded Russia’s rating to ‘B’ from ‘BBB’, putting the country on ‘Rating Watch Negative’.

What is the meaning of ‘junk’ grade?

The downgraded rating falls into the speculative or junk category, which indicates a default risk. It means that even though financial obligations are being met currently, still the sovereign is exposed to high credit risk.

Why were the ratings of Russia downgraded?

The severe sanctions that western countries have imposed on Russia, including the sanctioning of the Central Bank of the Russian Federation (CBR) and some large financial institutions, in response to its military invasion of Ukraine have caused the multi-notch downgrade of Russia’s ratings.

Sanctions have been imposed against the Russian central bank by the Group of Seven (G-7) major economies. Russian banks were also removed by them from the SWIFT inter-banking system which has been done to isolate Russia from global trade.

What effect do the sanctions have on Russia’s economy?

The imposition of coordinated and severe sanctions, along with the financial ramifications of potential delays in sovereign debt repayments, raises the potential of a long-term disruption of Russia’s economy and financial sector, thus impairing access to Russia’s financial reserves which were built to withstand adverse shocks.

The sanctions along with the sharp depreciation of the Rouble will increase greater macro-volatility, along with increasing the risk of a broad-based loss of domestic confidence, which will lead to bank deposit outflows and ‘dollarisation’. The sanctions imposed will also affect the GDP of the country hampering its potential growth.

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